The rise of 26-year old Charlie Shrem was swift. So was his
The self-professed computer geek turned divisive digital
currency entrepreneur won notoriety as the founder
of BitInstant. The firm took off, attracting investors like
Winklevoss twins, and helping popularize bitcoin.
Then, his whole world came crashing down. He was charged with
operating an unlicensed money transmitting business. He pled
guilty, and was given prison time.
He had “knowingly transmitted money intended to facilitate
criminal activity– specifically, drug trafficking on Silk
Road,” according to a
press release by the United States Attorney’s Office, Southern
District of New York.
Shrem got of prison earlier this year, and his experience
there hasn’t deterred his faith in bitcoin and blockchain, the
technology behind it. In fact, an incident with a prison guard
and mackerels, the currency of choice in prison, only
confirmed his belief in an alternative currency
A computer geek
Shrem opened up about his prison experience and his past
TABB Group COO Alex
Tabb, TABBForum producer Anna
Vested CEO Dan
Raised in a deeply religious orthodox Jewish household, Shrem
describes himself as an “outcast” at Yeshiva high school. “I just
loved computers,” he said in the podcast. “I would hang out in
the internet chat rooms and all of the places where all socially
awkward people hang out.”
Shrem first heard about the concept of Bitcoin from a friend
in an internet forum he was a part of. “There was no
website or anything,” he said in the podcast. “Only a white
paper,” referring to the research paper released under the
pseudonym Satoshi Nakimoto that unveiled the concept.
Bitcoin is a digital currency in which transactions occur
peer-to-peer, meaning no government or third party is
involved. Shrem was immediately interested and
purchased a few thousand bitcoin – at the time worth very
He caught the entrepreneurial bug early,
founding Daily Checkout, a daily deal website that sold
refurbished used goods, at 18. He also attended night school at
Brooklyn College and got introduced to the Austrian School of
Economics, an economic theory that promotes laissez-faire
ideals and the elimination of government
In his mind, something clicked. “I realized that bitcoin
was taking all of that Austrian economic theory and putting it
into practice,” he said in the podcast.
It was on Bitcointalk.org that he got the idea for a way to
make the purchasing of bitcoin faster and more accessible to the
every day consumer. He launched
which partnered with payment processors that had physical
locations at CVS, Duane Reade, Walmart, Walgreens and 7-11, among
others. The site allowed people to buy small amounts of bitcoin
(with an average ticket size of $300-500) and charged customers a
small fee for each transaction.
“Within a few months, we enabled people to be able to buy
bitcoin at almost a million locations in the US,” Shrem said in
the podcast. “And overnight volume exploded.”
The company achieved an average growth rate of 1.5x
per month, according to Shrem, with advertising limited to
word of mouth.
At one point, the company was
facilitating transactions worth a million dollars a
day, he said.
The growth of BitInstant attracted investors like
twins and angel investor Roger Vere. They moved into
bigger offices, shrouded in secrecy. “
We needed an
army security guard, our own floor, and shaded windows,” he
Soon the two man band become a 30 person office, and he
admits in the podcast interview that he let the success get to
Tyler and Cameron Winklevoss arrive at the Met Gala in New
“I started drinking too much,” he said. “I invested in my
friend’s nightclub. In fact, I lived upstairs in the nightclub.”
The fall of BitInstant was just as quick as its
The fall of BitInstant
In March 2013, regulators enforced a ruling that outlined
what type of companies were now considered money transmitters.
Suddenly, BitInstant was operating without a license. “We
couldn’t take the risk of operating illegally,” Shrem said
in the podcast, “so we shut down…It was
Eight months later, Shrem travelled to Amsterdam to
speak at a conference. It was when he returned to JFK
airport that he was confronted by a dozen law enforcement
officials, a joint task force of the FBI, IRS, DEA and other
officials, he said in the podcast.
Shrem had knowingly facilitated transactions to a
re-seller, Robert Faiella, whose customers were using the Silk
Road, an underground bitcoin only marketplace where people buy
and sell illegal drugs. The re-seller was also trying to
deposit more money than the new money transmitter laws allowed
for, and these transactions were done behind the scenes to get
around reporting requirements.
On September 4 2014, Faiella and Shrem both pled guilty in
connection with the sale of approximately $1 million in bitcoins
for use on the Silk Road website.
“Robert Faiella and Charlie Shrem opted to travel
down a crooked path – running an illegal money transmitting
business that catered to criminals bent on trafficking narcotics
on the dark web drug site, Silk Road,” Prett
Bharara, United States Attorney for the
Southern District of New York, said in a statement at the
Shrem, who was also Chief Compliance Officer of BitInstant
and thus in charge of compliance with federal anti-money
laundering (AML) laws, was fully aware that Silk Road was a
drug-trafficking website and
that he was
operating a Bitcoin exchange service for Silk Road users.
Nevertheless, he “knowingly facilitated Faiella’s business
with the company in order to maintain Faiella’s business as a
lucrative source of revenue, ” according to the court
“Even though it was Shrem’s job to enforce the Company’s
AML restrictions…[he] failed to file a single suspicious
activity report with the US Treasury Department about Faiella’s
illicit activity…and deliberately helped Failla circumvent the
Company’s AML restrictions.”
Shrem knew what he was doing, he said in the
podcast, and he admits his guilt.
Digitizing the Prison Economy
Prison “was no country club, but it wasn’t Rikers Island
either,” he explained in the podcast.
One out of every ten prisoners were white collar criminals
– a state senator, a judge, and a few law enforcement officials
were among his group. They were all nonviolent offenders so the
fear wasn’t as great as in maximum security persons.
That’s not to say it was easy settling in.
“Everything here is word of mouth,” he said in the podcast.
“There is no Google, information is trickling in. I think the
hardest part is learning to use my own resources to grow, and not
On the outside, he had this Bitcoin celebrity status,
he said, and in the prison, nobody knew him nor did they care
about him. “I needed to humble myself.”
Of particular fascination to Shrem was the prison
currency system, which involved bartering mackerels. According to
an article in the
Wall Street Journal, there has been a mackerel
economy in federal prisons since about 2004, when federal prisons
prohibited smoking and, by default, the cigarette pack, which was
the earlier gold standard. Prisoners need a proxy for the
dollar because they’re not allowed to possess cash.
Every inmate can only buy 14 mackerels per week, said Shrem, so
there is a certain number in circulation in the prison. Also, not
all mackerels are created equal. The fish expire after about 3
years, after which their value depreciates. Expired mackerels,
referred to as “money macks,” retain 75% of the value of the
“eating macks,” or non-expired fish, explained Shrem. There were
currency exchanges between the two, and everything had two prices
in the prison.
One day, a large number of mackerels were confiscated by prison
guards and left out for any prisoner to take. Overnight, the
guards essentially introduced hyperinflation, said Shrem, and
flooded the market. They lost all of their value.
This got Shrem thinking. He started to think about the
value of digitizing the prison economy and putting it
on the blockchain.
If there was a shared, distributed ledger among say
dozen inmates, everyone would have a
real-time record of all transactions that occurred in the prison.
All members would have to verify and validate a transaction to
make sure it was legitimate before taking place.
“Everyone has a financial incentive to make sure the system
maintains its integrity,” said Shrem.
The experience reminded him of how blockchain could not
only be useful, but also necessary – not only in the financial
services world, but in the prison world.
avoids the guards having power over the
value of the mackerel.
Shrem’s belief in the power of the bitcoin blockchain and
the elimination of the middleman continues. He sees the
digital currency as a “great equalizer” and believes that
itcoin will do to money what email did to the
postal service. “It will allow everyone to be
Despite Shrem’s optimism, the hype around Bitcoin seems to
have died down from initial levels. Now, the investment and
seems to be focused on the
the technology behind bitcoin.
Digital currencies have also been challenged by recent
security issues. In August, hackers stole $72 million
worth of bitcoin from accounts at the Hong Kong cryptocurrency
exchange Bitfinex. And in June, hackers stole $55 million worth
of ether, a bitcoin rival. The nonprofit that runs ether,
Ethereum Foundation, just rolled back the chain. It’s as if the
hack never took place, and business returned to normal. But that
worries purists like Shrem.
He continues to be a staunch believer in the integrity of
the blockchain and denounces Ethererum’s decision to roll back
the chain, even though he said he is friends with the founder.
“Once you change the ledger for one
specific reason, then you’ve already set the
“I used to be a bitcoin maximalist, thinking bitcoin is the one
and only blockchain,” he said to Wall Broadcast. “Now I
believe that alternate chains can and do exist.”